Stablecoin Contagion

In the past few months, we have all witnessed Stablecoin drama take the CryptoVerse by storm. Stables slid, the CT raucous roared, and we all looked on in disbelief as USDC dove to the worrisome realm of $0.85. Contagion was widespread as other stables followed suit.

Admit it. Did you think we were going to zero?

Albeit the contagion was a factor of the broader macro markets, centralisation has left an ever more sour taste in users’ mouths. It didn’t stop there. Following the stablecoin pandemonium, Coinbase received a Wells notice, off-ramps have blown up, and the SEC began its crypto purge.

Screw that. It’s time to seek decentralised alternatives.

Apart from USDT, which seemed to be the best-worst option and saw serious inflows during USDC contagion, stables that boasted decentralisation as key philosophy faired far better than their centralised counterparts. For example, LUSD, a CDP stablecoin backed purely by ETH fell to $0.968 compared to DAI and FRAX, backed mostly by USDC which both fell to $0.88

Since April 2022, we have seen a steady decline in Fiat- collateralized stablecoins supply, and since the USDC contagion in March, amid additional centralisation risk, this decline rapidly increased

What is the reason for this? Are users simply flocking to Bitcoin and Ethereum? Or are we on the verge of a mass shift into decentralised stablecoin alternatives? There is no denying that finding viable alternatives to stablecoins is on a lot of users’ minds right now.

I mean, you’ve been thinking about it, right?!

Enter Ethos Reserve. An apropos solution.

A suped-up, decentralised stablecoin reserve monster. 

Forged by the notable Byte Masons, Ethos Reserve is a next-gen protocol recently deployed on Optimism. The Byte Masons already have a full suite of DeFi primitives outlined in the article below. Ethos Reserve ties everything together.

A CDP stablecoin protocol at heart, Ethos Reserve is also fluently interlinked with an evolved lending market and a next-generation yield optimiser. These souped-up underlying mechanics unlock some mind-boggling benefits for users.

It’s time to $ERN in a decentralised way.

Decentralisation is key. Ethos reserve caters to this with a CDP stablecoin, known as the Ethos Reserve Note (ERN), that's backed by Bitcoin and Ethereum. There is no reliance on any other stablecoin provider and solely relies on backing via the two decentralised crypto giants.

Note: as deployed on Optimism, BTC is a wrapped variant, so does rely on a “centralised party” in some avenue. 

Optimism Stablecoin market

For Optimism’s stablecoin market cap, there is still a 55% dominance on USDC. Notably, the synthetic decentralised option, sUSD, has a considerable market share on the network with a market cap of $70 million. While evidently a different mechanism and narrative, does this provide a rough idea of where ERN could head? And being Optimism native, could ERN reach far loftier heights?

Creating a position

To create an ERN position on Ethos, users must supply either wBTC or wETH as collateral and borrow off their position. Ethos Reserve issues interest-free loans denominated in the Ethos Reserve Note (ERN). Instead of paying interest, users pay a small issuance and redemption fee for positions, a similar concept to Liquity Protocol. This fee is charged at 0.5% for both Issuance and Redemption, meaning that a total round trip will charge users a 1% fee.

Compared to typical lending rates, as shown with the Aave Optimism market below, this can be far less than the interest typically paid for a stablecoin position. However, this does depend on time frames and how often you are entering and exiting positions.

So far, we know that Ethos Reserve offers users an option to mint a decentralised stablecoin on Optimism. And while a potential game changer in its own right, the protocol has a lot more going on under the hood.

Asset Management Protocol

Ethos Reserve is not only a CDP stablecoin issuer but it's also a souped-up asset management protocol vertically scaled by Byte Mason’s underlying suite of DeFi protocols. Whoa, slow down. What does this mean?

Bitcoin and Ethereum deposits don't simply sit there idly, they are optimally put to work.

Imagine balancer-boosted pools but for a CDP stablecoin.

Ethos actively manages the underlying assets within low-risk DeFi yield strategies. All strategies utilised are deemed to be the lowest-risk environment possible, and users will always be able to redeem underlying assets from the protocol no matter the state of market liquidity.

All asset management is controlled by Byte Mason’s very own financial automation engine baselayer — Reaper Farm. Reaper routes assets through low-risk, delta-neutral, multi-strategies and a portion of this generated revenue then buys back the Byte Mason native token, OATH to distribute to participants in the Byte Mason Ecosystem.

Stability Pool & Staking Pool

As shown above, Issue/Redemption Fees and a portion of all yield asset management revenue is distributed to both the Stability pool and Oath stakers (Staking pool). Let’s break these down.

Stability Pool

The stability pool in a single-sided ERN pool. The protocols Bitcoin and Ethereum reserves are routed through Reaper Farm to enerate a sustainable yield based on the current market interest rate. A portion of this yield is then redistributed to ERN stakers.

ERN stakers also earn additional yield from liquidation income. I.e Any time a Collateral ratio falls below the recovery liquidation ratio (currently valued at 150%) part of the collateral will be liquidated and a small fee is paid out to ERN stakers in the collateral of choice (BTC or ETH).

Essentially, as a user creating an ERN position, you are depositing assets to be actively managed by a protocol/ team that has spent the past few years aiming to perfect optimised yield strategies. The yield this optimised strategy generates earns you around 6% APR in the decentralised stablecoin single-sided stability pool.

Staking Pool

Harnessing the power of Balancer technology, Bonded OATH, (bOATH) is an OATH — ETH 80/20 liquidity pool token that serves as the governance token for the Byte Mason protocol suite.

Users must create the pool BPT token on Beethoven X and head to Ethos Reserve. The BPT then automatically shows in users’ wallets to then stake directly on Ethos Reserve to earn additional incentives.

This structure for OATH ensures:

1. Deeper liquidity.

2. Hedging and price appreciation relative to ETH.

3. An Efficient incentive program.

4. Asymmetric upside potential for holders.

Once staked on Ethos, the BPT naturally accrues Beethoven X trading fees while receiving the additional incentives on Ethos Reserve. What additional incentives?

bOATH stakers earn all Issuance and redemption fees from Ethos loans, as well as all trading fees generated by the Reaper farm buyback incentive strategy.

Issuance and redemption fees

Any time a user wishes to create, or redeem an ERN position by depositing BTC / ETH collateral or paying back their ERN debt, they must pay a small fee of 0.5%. This fee is directed to the staking pool. This allows bOATH stakers to derive additional value from arbitrage and ERN volatility.

Buyback Fees

Additionally, while generating yield with protocol reserve assets, Reaper will sell the underlying farming tokens and buy back OATH to distribute to stakers. Any fees generated will flow to bOATH stakers. The number of fees (thus yield) flowing to bOATH stakers will increase alongside any uptick in liquidity and activity on Ethos. Coupled with an increase in OATH buybacks, bOATH is a potentially promising avenue to gain exposure to the byte mason ecosystem.

Stability and staking pool summary:

Stability Pool

• Single Sided ERN pool

• Earns a sustainable yield from the asset management of protocol reserves

• Earns additional yield from liquidation income

Staking Pool

• Beethoven X BPT token (80/20 Oath/Eth) Staked on Ethos Reserve

• Earns underlying swap fees from Beethoven X

• Earn all Issuance and redemption fees from Ethos loans

• Earns all trading fees generated by the Reaper farm buyback incentive strategy.

Ethos has only been live for 48 hours. Here are the stats:

The route to DeFi dominance

The stability pool will not be the only route to earning staking incentives on ERN. As a newly deployed stablecoin on the network, the Byte Masons will look to make a splash and bootstrap liquidity as fast as possible.

Which makes you ask the question: How do you bootstrap liquidity in DeFi?

Incentives.

The Byte Masons will actively incentivise multiple different ERN Liquidity Pools across Optimism. In the early days, it’s likely that ERN pools will be receiving fairly lucrative emissions.

Currently, the only source of ERN liquidity outside of Ethos is Beethoven X, and there is already a substantial amount of OATH supplied as incentives to drive deep liquidity for this pool.

So, what’s the play?

A new native decentralised stablecoin on Optimsim, vertically scaled via an asset management optimiser …

Certainly sounds like it has the potential to make some waves. So apart from sitting back and watching the rise of ERN liquidity, how could you participate in the ecosystem?

This is NOT financial advice. Please do your own research.

1. The Safe Bet

A simple solution to earn optimised yield on two crypto giants.

1. Deposit ETH/BTC as collateral and borrow a healthy ERN position.

2. Supply your ERN to the stability pool and earn a comfy ~6% APY on your 0% interest ERN stable bag.

3. Longer time frames are more efficient due to the issuance and redemption fees.

2. The bOATHer

This strategy suits users who have an active bOATH position. bOATH is essentially a bet on the success of ERN and all Byte Mason primitives. As Liquidity increases on Ethos so will the fees bOATH stakers recieve and the buy pressure from OATH buybacks.

1. Deposit ETH/BTC as collateral and borrow a healthy ERN position.

2. IF LP incentives > stability pool APR, pair ERN with USDC and supply your ERN to the ERN/USDC pool on beets.fi (or any active ERN stable pool)

3. Earn OATH on your position

4. Supply OATH to the Bonded OATH pool on Beets.fi

5. Stake Bonded OATH BPT into the staking pool on Ethos

6. Harvest your earned ERN from the stability pool deposit back into the ERN/USDC pool

7. Repeat steps 2 - 6

8. Repay your ERN position when needed with ERN from the ERN/USDC pool.

3. The degen

One for the degens, this requires you to have your finger on the pulse on all the newly launching ERN pools. Note: you will need to repay your ERN position at some point, if you are supplying to any LP, realise that the value could fall relative to your active ERN position.

1. Deposit ETH/BTC as collateral and borrow a healthy ERN position. Or trade into an ERN position.

2. Search around, and pair your ERN with any of the newly launched ERN pools

3. Supply earned OATH to the Bonded OATH pool on Beets.fi (or any active ERN stable pool)

4. Stake Bonded OATH BPT into the staking pool on Ethos

5. Harvest your earned ERN from the stability pool and deposit back into the newly launched ERN farms with high emissions.

6. Repeat steps 3 - 5

7. Repay your ERN position when needed.

Outro

Intrigued? Inspired? Interested? Me too.

Who doesn’t love discovering promising protocols in the period before they flourish?

It’s important to give a friendly reminder that Smart contracts are the hardest shiz in the game, and while the Byte Masons take security as the utmost importance, you are exposing yourself to additional smart contract risk by utilising a protocol that optimises your assets via multiple yield strategies.

Saying that, while Ethos is a new protocol, the Byte Masons certainly aren’t new to the block; the team has showcased their DeFi experience over multiple years with protocols that have managed in excess of $250 million of assets. I personally believe Ethos is a catalyst that will ensure the Byte Masons continue to become a renowned and notable firm of DeFi experts.

Enjoy ERNing.

With love,

Your favourite DeFi Astronaut